Economic recovery from COVID-19: we must not fall for austerity

THE coronavirus disease 2019 (COVID-19) pandemic will have profound impacts not only on the health of populations and on the integrity of health care systems but also on national and global economies. International agencies have braced for a global economic contraction. In Australia, the Prime Minister has spoken of the need to place the economy in hibernation, while the government and the Reserve Bank build a “bridge” to the far shore of the pandemic. This article seeks briefly to describe these economic impacts for a health care audience and to identify some of the challenges, risks and possible opportunities they may pose for the Australian health care system.

The social distancing measures being used to control COVID-19 include a shutdown of non-essential economic activity, in order to keep as much of the population at home as possible. Businesses from corner coffee shops to national airlines have shuttered their premises and sent their staff home in great uncertainty; some firms will not survive (here and here). Unemployment rates have risen instantly in response – hundreds of thousands of Australian workers have already lost jobs due to the pandemic. We don’t yet have updated official unemployment statistics for Australia, but over the past 3 weeks, more than 16 million Americans have filed for unemployment. Stock markets have suffered huge losses, while real estate markets have seized up. Many Australians have already suffered a significant loss of income, while most will also suffer a loss of financial wealth over coming months. Without appropriate interventions, these impacts will be compounded by rising indebtedness as households struggle to survive.

To avoid a depression, the Reserve Bank of Australia has cut interest rates and introduced quantitative easing, while the Australian Government has committed hundreds of billions of dollars to temporarily raise unemployment benefits, make direct payments to some households, and to subsidise businesses to retain their workers. Yet the kind of stimulus spending that would seek to reignite flagging economic activity in a “normal” downturn cannot act via its usual mechanism of stimulating demand because the economy cannot yet “restart” safely. For now, this massive spending is necessary simply to allow workers, families and their employers to survive financially.

While we still cannot be sure of the ultimate impact of COVID-19 on employment and national income, we do have a good understanding of how economic contraction affected health following the Global Financial Crisis (GFC). Countries that are able to avoid the outright collapse of basic services (eg, avoiding mass hunger and homelessness) broadly suffer the health impacts of recession or depression through two main transmission mechanisms: unemployment and austerity.

Unemployment is associated with higher all-cause mortality, cardiovascular deaths and suicides, and elevated rates of anxiety, depression and substance misuse (to which will be added the unique mental health impacts of lockdown measures) (here and here). These effects are not simply the result of falling into poverty due to joblessness, they also reflect the psychological and status impacts of loss of work. And the larger the eventual scale of unemployment, the larger the number of unemployed workers who will never work again, even after the economy recovers. The massive efforts of the Australian Government to minimise the unemployment impacts of COVID-19 are therefore very well founded in terms of protecting health. Unfortunately, the speed and scale of the initial job losses as economic activity shut down to fight the pandemic were already large enough that many Australians will inevitably arrive on the other side of the bridge without a job. Further publicly funded efforts will be required to employ affected people as rapidly as possible, including employment through major public works programs and perhaps the creation of a Job Guarantee program.

Austerity measures – deep public spending cuts – were imposed across many European nations by governments seeking to rein in public sector spending deficits following huge spending in the immediate aftermath of the GFC (much of it on bank bailouts). This spending started to be wound back as early as 2011; yet this move to austerity was premature and it had profoundly negative societal and health consequences (here and here). In Greece, health outcomes worsened sharply, as nominal health expenditure per capita halved between 2008 and 2015 (here and here). Austerity measures and spending constraints on public health care and social care in England have also been linked with substantial increases in mortality in older age groups relative to pre-crisis trends. Ill-considered attempts to rein in public spending after an economic contraction thus seem to be as likely to damage health as the direct impacts of the recession itself.

On the other side of COVID-19, Australia will have a greatly increased public debt, at levels previously seen only in wartime. Yet future Australian governments must not fall prey to the self-defeating delusion of austerity however loud the siren voices of fiscal rectitude may become. Health professionals and policy makers should understand that future austerity measures represent probably the single greatest risk to health system integrity in the aftermath of COVID-19.

Shorter term, perhaps the most pressing post-COVID-19 economic risk to the Australian health care system lies in its high reliance on out-of-pocket expenditures by individuals. In 2017–18, expenditure by individuals constituted 16.5% of total health expenditure, while spending through private health insurance accounted for only 8.9% of total spending. Internationally, Australia stands out as relying on high levels of out-of-pocket spending: 18.9% of current health spending in Australia versus an average of 13.7% across all high income countries. Australians will arrive at the other side of the bridge with significantly reduced incomes and wealth, and many households will simply be unable to afford the current level of out-of-pocket costs. Providers will have to revise their expectations (and their gap fees) downwards to match ability to pay, and policy will need to critically re-examine the financing model that has prevailed for several decades.

Across both public and private health systems, there will be a significant backlog of elective and less acute patients whose care has been disrupted by the COVID-19 response, contributing to significant demand pressure almost as soon as the pandemic eases. Workforces may be fatigued, dislocated and disrupted after substantial redeployment during the pandemic. In bleaker scenarios, the workforce may have been depleted by direct COVID-19-related casualties, and the longer term effects of stress and psychological trauma. If COVID-19 causes large or persistent pressures on the hospital system, normal funding mechanisms (eg, activity-based funding) will almost certainly be suspended. Ironically, in an otherwise deflationary economy, the medical supply chain may be one sector in which price inflation starts to be a major problem, as massive spending on pandemic counter-measures chases limited supply capacity. Together, these impacts mean that the recovery phase will be every bit as challenging as the ramp-up of the emergency response.

Disruption in Australia’s private health care sector may be longer-lasting than in the public sector. The publicly funded mobilisation of private hospitals to support the pandemic response is essential. Yet their demobilisation is likely to be complex and fraught, not least because of the uncertain impact of the crisis on private health insurance. Over the coming months, private health insurers will experience windfall gains – insurance premiums will still be paid in, while claims will fall dramatically due to pandemic restrictions on elective surgery and routine care. However, as the larger income and wealth shock to households plays through, many will be forced to cancel their health insurance. Declining insurance coverage and declining ability to pay out-of-pocket fees may pose a grave challenge to the viability of the wider private health sector within 1 to 2 years. Meanwhile, the wealth shock from superannuation and property prices may also have profound impacts on the aged care sector.

Governor Lowe’s bridge may deliver a rather ragged-looking column of Australians to the other side of the pandemic. The next phase requires getting everyone off the bridgehead rapidly and effectively, with little room for rest or respite. The government must keep its nerve fiscally; premature reduction of public spending will trigger the very depression today’s unprecedented policies have been designed to prevent. Yet important opportunities may become visible in the months and years ahead.

Almost overnight, telehealth has been granted an opportunity to demonstrate its capabilities at scale; if successful, it is hard to imagine turning the clock back. Restrictions on elective surgery and non-urgent care will cause distress and harm to some patients; yet they also represent a unique natural experiment in reducing overtreatment, overuse and adverse safety events, which will benefit other patients. The insights this extraordinary period yields might offer important signposts towards building a future culture of sufficiency and “right care” (here and here). The need to demobilise the health system after COVID-19, and the changed economic landscape against which that demobilisation will take place, offers a generational opportunity for deep reform of the Australian health system. This is the point at which previously endemic and intractable problems of poor integration, excessive complexity and poor value may finally be addressed, but only if action is swift and decisive. Ultimately, though, the most important economic choice has already been made. Australia has chosen to prioritise human life over economic growth. The greatest opportunity of all lies in us staying true to this moral choice in the years ahead.

Martin Hensher is Associate Professor of Health System Financing and Organisation at the Institute for Health Transformation, and Deakin Health Economics.

The statements or opinions expressed in this article reflect the views of the authors and do not represent the official policy of the AMA, the MJA or InSight+ unless so stated.